WHAT'S NEW

Posting a healthy start in 1Q18.

Net profit surged by 139% to S$3.4m on the back of a 37% growth in revenue to S$19.2m. Revenue was within expectations, and accounts for 22% of our FY18F forecasts. The surprise came from higher-than-expected gross margin of 46% in 1Q18 (1Q17: 43.2%), coupled with lower effective taxes.

Revenue growth driven by acquisitions, organic growth.

The jump in group revenue was driven mainly by an increase in revenue of its Health Business which surged by 47.7% y-o-y to S$14.3m. This largely came about from acquisitions completed in 2017, namely Astra Companies and Kids Clinics (which comprises Children’s Clinic Central, Kids Clinic @ Bishan, and Babies and Children Specialist Clinic).

Management also indicated that its existing operations also saw robust double-digit growth.

In addition, Diagnostics and Aesthetics Business segment registered 14.2% y-o-y growth in revenue.

Diagnostics to ramp up further.

Its diagnostics segment is expected to show sequential improvement as its new facility ramps up further. It recently opened a new diagnostic centre at OUE Downtown, and its newly located 5,500-sqft Novena has been fully operational since February 2018.

Management indicated that utilisation at its Novena centre is only hovering around 45-50%, and has potential to further increase to achieve the same utilisation seen at its Paragon facility. Its OUE Downtown centre is understood to be still operating at a loss, and further increase in utilisation will aid in contributing to the bottom line.

Share of JV/ associates losses declined as envisaged.

Following on the trend from 2H17, share of losses of associates/JV dropped to S$12,000, from S$48,000 a year earlier.

Management indicated that this was helped by PT Citputra SMG in Jakarta (which turned profitable), share of profits from CHA SMG (Australia), offset by losses in Vietnam. Its Vietnam investment was made in January 2017, and is still in the ramping-up phase, though management opine that their optimism is based on the improving trends seen.

SW1 acquisition completed in April.

SMG has completed the acquisition of SW1 aesthetic clinic in April and management indicated that it is a profitable operation, with contributions to be seen from 2Q18.

Recall that SW1 is operating out of Paragon in a 7,000-sqft clinic with a team of five aesthetic practitioners and one plastic surgeon. With respect to the litigation suit against the founders of SW1 (Dr Low Chai Ling and Dr Kenneth Lee), management believes that the allegations are groundless.

Outlook

Numerous plans ahead.

Going forward, we expect management to be able to continue delivering growth from the slew of business pursuits. It has opened a new O&G clinic in Paragon (March 2018) and paediatric clinic in Bedok (April 2018), increasing its O&G and paediatric clinics to 14.

It has also started its Cardiology practice and opened two new clinics, one each in Novena and Paragon, in March and April 2018 respectively.

For its diagnostics segment, it expects to add an additional radiologist and a visiting consultant radiologist in 3Q18.

Singapore Medical Group's share price has corrected by c.10% since the group’s 4Q18 results were released, coupled with the announcement of its 1-for-20 rights issue to raise up to c.S$11m (max of ~23m rights shares to be issued).

We believe the decline in share price, in part, was also due to the weaker than expected performance in 2H17.

Strong growth expected, maintain Target Price and recommendation.

On the back of SMG’s 1Q18 results, we believe the growth trajectory continues to be intact, and will achieve our forecasts with ease, driven by acquisitions done last year, coupled with the continued ramp-up and operational efficiencies.

We are maintaining our forecasts for now. We have factored in share base dilution from the 1-for-20 rights issue. SMG is trading at 19x/17.6x FY18F/19F PE which implies a FY17-19F PEG of c.0.6x.

We maintain our BUY call and Target Price of S$0.73, based on 25x FY19F PE.

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